HR Futures Down $200-$250, Busheling Futures Down $65 to Start ‘22

CME Hot Rolled Coil Futures Curve $/st

Open interest across all HRC futures set another new all-time record in January at 903,080 short tons, up from 871,320 in December. In the chart below the red line is the aggregate open interest across all futures months with the yellow dotted line a 22-day moving average. The sharp decline in price and open interest is when the 2nd month “rolls” out of February into March upon January’s expiration and the open interest in the January future terminates.

Rolling 2nd Month CME HRC Future $/st

This chart shows little movement so far this week in the HR curve outside of the $43 decline in February. As noted, the curve’s backwardation has flattened sharply over the month indicating 2021’s steel shortage has cleared. In fact, it can be argued that the domestic steel market is now oversupplied. Regardless of supply, has the futures curve already discounted the price adjustment currently underway in the physical market?

Put yourself in the shoes of a service center or importer receiving $1,500 master coils. The price risk management choices are not attractive. February’s future at $1,175, March at $1,000 or April at $960. No low hanging fruit here, no meat left on the bone. The CRU and December future settled at $1,616, down $183 from November, while January settled at $1,417, down $199 from December. At $1,175, February is pricing in a $242 decline to January and March at $1,000 is pricing in another $175 lower after February. A total of $799 over the four-month period.

You can go back and read my past articles to verify that I have been recommending folks be “open-minded” about how far prices could go, and I stand by that recommendation. Point being that, sure, hot rolled could fall well below $1,000 by March, but then again perhaps it stays above $1,200. Who knows? Definitely not me, but I do wonder if the curve has overpriced the correction? Open-mindedness works both ways. 

CME Hot Rolled Coil Futures Curve $/st

“What’s that? Then sell, sell, sell!! They’re all selling? Then buy, buy, buy.” – Al Czervik, Caddyshack

Warren who? University of Chicago what? Everything I learned about investing I learned watching Caddyshack.

Speaking generally about bear market sell-offs and spikes in volatility in the trading of any financial market, short-squeezes and wild swings in price are a part of it. Even in last year’s extremely steady bull market there were a couple of sharp price corrections lower. This chart shows the June ’21 HR future correcting $148, $75 and $110 through the first half of ’21.

June 2021 CME HRC Future $/st

This chart of the August ’21 future shows its $110 correction in March and $241 correction in May. Sure, they were short-lived, but they were big moves that can’t be ignored.

August 2021 CME HRC Future $/st

This chart shows the spread between the CME HR and Shanghai Futures Exchange (SHFE) Chinese HR futures with the white line comparing the rolling 2nd months and the red the rolling 5th month futures. The horizontal lines are each spreads respective of the 2018 high. While the spread is currently at elevated levels, it has moved back into the top of the pre-pandemic range. This analysis takes a different angle by bringing to question if the value of the March CME HR future settling today at $999 and June CME HR future at $911 are appropriate values or if they have overcorrected. However, while these spreads have fallen back below the top of the previous range, the bottom of the range has been in negative territory (China price was above the price in the U.S.), so the case can be made there is plenty more to go on the downside as well.

CME Midwest HR Minus SHFE Chinese HR 2nd (wh) and 5th (red) $/st

In my Jan. 6 article, we got technical discussing the “head and shoulders” pattern in the 2nd month busheling future. Since then, January busheling settled down $61.48 at $542.33 while the entire curve has continued to decline.

Rolling 2nd Month CME Busheling Future $/lt

The selling has continued with the February busheling future trading down to as low as $515 on 1,000 tons, while the explosion in open interest is on track to make a new all-time record high this month.

Rolling 2nd Month CME Busheling Future $/lt

Since Jan. 6, the busheling curve has declined $65 in the February, March and April futures and $50 in May and June.

CME Busheling Futures Curve $/lt

Disclaimer: The content of this article is for informational purposes only. The views in this article do not represent financial services or advice. Any opinion expressed by Feldstein should not be treated as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Views and forecasts expressed are as of date indicated, are subject to change without notice, may not come to be and do not represent a recommendation or offer of any particular security, strategy or investment. Strategies mentioned may not be suitable for you. You must make an independent decision regarding investments or strategies mentioned in this article. It is recommended you consider your own particular circumstances and seek the advice from a financial professional before taking action in financial markets.